Detroit suburbs balk at spinning off water works to help city

Time is running out for Detroit Emergency Manager Kevyn Orr to persuade suburban leaders and bondholders to help the city wring cash from its water-and-sewer system, a key to resolving its bankruptcy.

The Detroit-owned utility serves 127 area communities that now pay for its services. Talks to lease the system to a new regional authority that would generate revenue for municipal services are bedeviled by mistrust and the cost of upgrading a network that serves 40 percent of Michigan's population across 1,079 square miles (2,795 square kilometers).

Of the $18 billion in long-term debt the city is restructuring, $5.8 billion belongs to the water system. Republican Gov. Rick Snyderand nine private foundations pledged $680 million to shore up pensions and shield Detroit's art collection from creditors. Leveraging the water department's value, and the $744 million it produced last year, is an elusive element of a plan Orr must submit to a judge by March 1.

"What's it going to cost Macomb County residents?" said County Executive Mark Hackel. "That's one thing you don't hear in these discussions: How do we minimize future costs for the upgrade and everything else?"

Detroit divide

Orr must overcome a generation-long divide between Detroit and its suburbs, some with per-capita incomes four times as high as those of city residents. He also must convince other governments that joining a new system won't imperil their finances. The July bankruptcy froze the market for Michigan bonds, forcing at least three municipalities to delay deals in the face of higher borrowing costs.

Upgrading pipes, basins and pump stations may cost as much as $7 billion, said Gerald Poisson, chief deputy executive of Oakland County, which borders Detroit to the north and has a AAA rating from Standard & Poor's.

Suburban customers are leery, said Robert DiMella, co-head of MacKay Municipal Managers, which oversees about $7.5 billion of local debt, including Detroit water and sewer bonds, in Princeton, N.J.

"They don't want their rates to go up four- or five-fold just simply to bail out Detroit," DiMella said. "They want to know that if it gets refinanced, certain dollars don't go directly to Detroit to help their current cause, but it's used for maintenance."

Slow progress

The makeup of a regional board and the question of who would pay for repairs, maintenance and debt are unresolved, said Oakland County Deputy Executive Robert Daddow. The existing seven-member water board is appointed by Detroit's mayor, four people representing the city and three from suburbs.

"Progress is being made, but it's slow," Daddow said.

Divorcing the department from Detroit and its tarnished name would allow cheaper refinancing of the $5.8 billion of water-and-sewer debt, said Orr's spokesman, Bill Nowling.

"There is a premium that the water and sewer department currently pays on its financing because it's associated with the city of Detroit," Nowling said. "Bringing down the cost of borrowing is a major component in the overall cost structure for the authority."

Orr in his bankruptcy filing classified the bonds as secured debt, which he plans to repay in full, while general-obligation bonds are among $11.5 billion in unsecured debt he wants to reduce.

Bondholder leverage

That means that any plan to alter the system's structure must satisfy bondholders promised that payments will continue.

"Bondholders hold all the cards," said Paul Mansour, head of municipal research at Hartford, Conn.-based Conning, which oversees about $9 billion of local debt. Though a regional authority makes sense, investors are "not going to give up something without something in return," he said.

Suburban officials may take a similar stance. They have long complained of mismanagement, a lack of input into rates and decaying infrastructure.

In 2012, former department director Victor Mercado pleaded guilty to rigging contracts to benefit then-Mayor Kwame Kilpatrick and his friend, Bobby Ferguson, an agency contractor. Kilpatrick was sentenced in October to 28 years in prison for corruption.

Whoever runs the system will inherit higher costs for repairs that were deferred for years, said Wayne County Executive Robert Ficano, who is involved in the negotiations. Until last year, the system spent 35 years under federal oversight to reduce sewage overflows into the Detroit River.

Flint flight

Rates are expected to rise 4 percent in July. Detroit's combined residential rates in 2009 were ranked 22th among 50 large U.S. cities in a survey by Black & Veatch, an engineering consultant based in Overland Park, Kan. The ranking was based on households using 7,500 gallons a year.

The Detroit system's rate increases for Flint, Mich., prompted officials there to start digging their own 84-mile pipeline from Lake Huron. It will be cheaper for 250,000 customers who've seen rates rise 342 percent since 2000, according to data from Genesee County Drain Commissioner Jeff Wright.

The Karegnondi Water Authority, which is building the pipeline, borrowed $35 million to begin construction, Wright said. Total estimated cost of the pipeline is $275 million, plus $60 million for a new treatment plant, Wright said.

Losing Flint-area customers will cost the Detroit system about 6 percent of its revenue, according to the department in an April 2013 statement.

Bond uncertainty

Water-and-sewer bond trades since the bankruptcy filing show investors are uncertain about their investments. The debt has changed hands at prices ranging from less than 80 cents on the dollar to more than face value.

The varying levels reflect in part the credit quality of the insurers backing the securities. Those include Berkshire Hathaway Assurance Corp.., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp.

Ficano, the Wayne County executive, said bondholders would rather see the city make draconian cuts elsewhere than put their investments at risk with a restructured water department.

"It's in the interest of a lot of creditors to strangle the situation because they don't want precedent set for other municipal bankruptcies around the country," Ficano said.